Myanmar has finally taken the bull by the horns and is serious about finalizing the Kyaukpyu port — the first stage in the Kyaukpyu SEZ project. The Myanmar government has been under increasing pressure from Beijing to sort out the details of the project, which has been seriously stalled for years. This project is key to China’s strategic push into the region and beyond, as part of the Belt and Road Initiative. Relations between the Myanmar and China are growing stronger and the agreement on Kyaukpyu will undoubtedly strengthen them further. Negotiations are proceeding and are expected to be finalized soon, in time for the scheduled state visit of the Chinese president in November, his first to their important ally. Myanmar’s deputy finance minister – now in charge of the Kyaukphu project – says fresh negotiations are underway to resolve the impasse, which has prevented progress being made on the Chinese-backed project for more than three years. “Progress so far has been promising, and there is general agreement that the project should be scaled down,” the minister, Winston Set Aung told South Asian Monitor recently. “It will be a demand-based rather than a supply-based project, and any expansion of the project will only be considered if there is sufficient demand for it,” he added. Much of the current government’s worries about the proposed contract – after former President Thein Sein agreed to allow the Chinese consortium led by CITIC to develop the project in 2015 — was the danger of the project becoming a “white elephant” and leaving the Myanmar government heavily in debt.

“The terms of the proposed contract are unfair to Myanmar, we cannot accept them,” the Commerce Minister Than Myint – then in charge of the Kyaukphu negotiations, told SAM last November, on the eve of a trip to Beijing to discuss a host of bilateral matters with China, including Kyaukphu. This is something the Myanmar government’s chief economic advisor Sean Turnell voiced warnings about earlier this year, calling it “crazy” and “absurd”. The project – as originally negotiated — is heavily over capitalized, he told SAM some months ago. And there is a danger of a repeat of the fate of the Chinese projects in Gwadar in Pakistan and Sri Lanka’s Hambantota port, where Colombo borrowed heavily to construct the port, but could not repay the loans and had to give China a 99-year lease as debt relief. He even visited Sri Lanka earlier this year to see the problems for himself.

“We have already agreed that the Myanmar government will not fall into a debt trap over the Kyaukphyu port or the SEZ [Special Economic Zone],” Winston Set Aung said. So far the details of the on-going discussion are confidential. But according to senior government sources involved in the negotiations, the port project has been scaled down from the original capital plan, with current projections just under a billion US dollars, compared around over $7 billion before – and a further two billion for the SEZ. “It was way bigger than it should or needs to be,” said Sean Turnell. Not more than ten percent of trade with China will go through Kyaukpyu, he estimated. But if it all went through Kyaukpyu, the port would utilize less than 30% of the planned capacity in the next five years. The proposed contractual arrangement between Myanmar and the Chinese consortium was also a sore point. Originally the Thein Sein government agreed a 15% split for Myanmar and CITIC had the remaining 85%. Of course, the previous government caved into Chinese pressure. When the NLD took over the negotiations, they insisted on a 30% share. The Chinese consortium reluctantly agreed, but insisted that they had to provide a financial contribution for the extra share of the project. “The Myanmar consortium just wants more shares but they don’t want to take more financing responsibility,” said Yuan Shaobin, executive president of CITIC Myanmar, in October last year. “The shift from 15% – means that they should take on some of the financing responsibilities from CITIC. Myanmar should take the same risk as us. We should have Myanmar partners who would be willing to take on the same risk with us. It’s business.” But according to senior government sources involved in the negotiations, CITIC have finally back tracked and the contract as it now stands, is 30% for Myanmar and 70% for CITIC, but at no cost to the Myanmar government. CITIC is no longer demanding that Myanmar borrow more than $ 2 billion from state-owned Export-Import Bank of China. The project will be financed through private borrowing with no government loans involved. Also, there will be no Myanmar government sovereign backing for any of the project’s debts. But the Myanmar government will pay its proportionate share of any future costs. The development of Kyaukpyu – port and SEZ — has been divided into segments, with the port the first project. Future expansion will only be initiated once the previous stage has been started and is profitable – earning income above the project’s variable costs, according to the government source. “Expansion will only be agreed if there is realistic demand for it, and it is in Myanmar’s interests,” he said.

Negotiations on the final contract with the CITIC consortium – which includes China Harbor Engineering, China Merchants, TEDA Investment, Yunnan Construction Engineering Group and Thailand’s Charoen Pokphand Group – are continuing, according to government sources. Issues around dispute mechanisms and arbitration are being reviewed, and provisions for economic impact surveys and social impact studies are also on the agenda. According to the initial master plan, the Kyaukpyu SEZ would cover a total of 520 hectares — 20 for the port, 100 for housing, and 400 for an industrial park. It allocated 50 % of the land to fisheries, 30 % to garment factories and the rest to other small enterprises. The ‘ownership’ split for the SEZ complex though is different thanthe port, and is likely to be renegotiated after construction actually starts on the port project. The economic zone faces stiff opposition from activists and residents who criticised the tender process for its alleged lack of transparency. They also complain that the development would have a negative impact on local people. About 20,000 people are at risk of losing their homes and livelihoods due to land acquisition for the zone, according to the International Commission of Jurists, a human rights watchdog. A cloud has hung over the planned deep-sea port in Western Myanmar ever since NLD took over the reins of government in April 2016 even though the previous government had approved the construction project as part of a major industrial complex mooted by the Chinese government to develop a Special Economic Zone in the area. Given the go ahead shortly before the elections, which saw the NLD win convincingly, work on it was stalled as the finer details of the project had to be ironed out, and the new government needing time to consider the project in more detail. The government came under increasing pressure from Beijing but resisted making a hasty decision. Controversy has dogged the planned deep-sea port in Rakhine state, in western Myanmar, ever since it was first proposed more than ten years ago. In mid-2007, the crony company with strong links to China, Asia World announced that it would be building a deep-sea port on Maday Island, in Kyaukphu. The port was to be a transit point for goods destined for Yangon, Kolkata, and Chittagong. Negotiations with the Myanmar subsidiary of the CITIC Group Corporation Ltd — formerly the Chinese state-owned China International Trust Investment Corporation – are now well advanced. The hope is to compete the deal in the next two to three months, according to the Commerce Minster, Thant Myint, in time to be signed during the scheduled state visit of the Chinese leader Xi Jingping in November.

The Kyaukpyu port in particular, and the SEZ are of enormous strategic interest to China. A deep-sea port on the Bay of Bengal would help China enormously to develop maritime access to the Indian Ocean and diversify its sea trade routes. The Kyaukpyu port would also give China an alternative route for its energy imports from the Middle East that crucially avoids the Malacca Straits and would save some 5,000 kilometers sailing distance for shipments to China from India and beyond. The drive to diversify its shipping routes – and to increase economic clout in neighboring countries – is a major impetus behind the new “Belt and Road” initiative, which envisions infrastructure and trade networks linking China with every part of the Eurasian continent. Though the project fits neatly into the Belt and Road framework, China’s cooperation in the Kyaukpyu Special Economic Zone was in progress years before the strategy was announced. In 2009, Myanmar signed a memorandum of understanding with China National Petroleum Corp. (CNPC) to build an oil pipeline linking Maday Island in Kyaukpyu with China’s southern Yunnan Province. That pipeline, which allows crude oil from the Middle East to be unloaded in Kyaukyu and shipped overland to China – was completed in January 2015. But at the same time CITIC signed a MoU with Myanmar to construct a deep-sea port and railway network in the Kyaukpyu Special Economic Zone. Unlike the oil pipeline, the rail and port projects stalled – and the railway MoU expired in 2014 withoutconstruction ever beginning. However, with the CITIC Group consortium now getting a green light, and resumption of the SEZ project also on the horizon, plans for road and rail links between Myanmar and China are being resurrected; this time as part of Beijing’s revised and grandiose China-Myanmar economic corridor.The China Myanmar economic corridor is expected to be signed in the near future, possibly during the Chinese President’s visit.

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